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World's Largest Pension Fund Suffers $64 Billion Loss After Doubling Down On Stocks
The thing about being a pension fund in a world where returns on risk free assets are at best an inflation adjusted zero and at worst guarantee a loss when held to maturity is that you’re effectively forced to go out and take bigger risks if you want to hit your targets. In the US, public sector pension funds cling to the fantasy that they can return 7-8% while still keeping risks manageable while a lower discount rate attributable to ZIRP and NIRP has caused the present value of eurozone defined benefit plan liabilities to soar. In short, the “lower for longer” rates regime can be tough for large pension funds to navigate as the whole enterprise becomes an impossible balancing act between achieving an acceptable rate of return and managing risk.
Earlier this month we took a look at the Q3 numbers for The Government Pension Fund of Norway (the SWF) and the picture was not pretty. In what amounted to the worst quarter in four years, the fund lost 16% on EM equity bets. All told, the SWF lost 5% in Q3.
Enter GPIF.
Back in March, we noted that Japan's $1.1 trillion Government Pension Investment Fund - the largest pension fund in the world - was a big seller of JGBs in Q4 as the fund moved aggressively into stocks on the heels of an October 2014 directive from PM Shinzo Abe who encouraged more risk taking. As a result, GPIF cut its targeted holdings of government bonds and doubled its target for stocks. Here's what we said earlier this year:
Pension funds the world over are increasingly adopting the same behavior as other investors in a world characterized by artificially suppressed yields: they’re shifting to riskier assets. In the case of US public sector pension funds this is a necessity because assumptions about investment rates dictate the discount rate used to calculate the present value of liabilities and so as soon as you admit you can’t make 8% when risk-free assets are yielding less than 2% in the US and close to or less than 0% in other locales, you effectively become even more underfunded than you already were. The solution is to take more risks in order to justify return expectations and in the US the percentage of funds' capital dedicated to equities has risen from under 30% in the mid-eighties to as high as 60% more recently while the fixed income allocation has steadily fallen.
As you might expect, Japanese public pension plans are also feeling the heat as the BOJ has driven yields on JGBs into the ground by planning to monetize the entirety of gross issuance. The result has been a truly epic shift out of domestic government bonds. As Bloomberg reports, Japan’s Government Pension Investment Fund sold nearly $50 billion in JGBs in Q4, opting instead to chase after higher returns in the stock market.
Now clearly, promoting risk-taking with assets earmarked for public sector employees’ retirement is a strategy that has the potential to go south in a hurry if the market moves against you and because you can't designate your equity portfolio as "held to maturity," you run the risk of incurring substantial losses.
Well, maybe Abe just assumed that perpetual Kuroda plunge protection would ensure that no matter what, equities wouldn't swoon, or perhaps everyone in Japan still believed that an Abenomics-led economic renaissance was just around the corner and so stocks were the place to be, but whatever the case, Japanese public pension funds' dramatic shift into equities looks to have cost them dearly in Q3 as GPIF just turned in its worst quarter since 2008.
"The 135.1 trillion yen ($1.1 trillion) Government Pension Investment Fund lost 5.6 percent last quarter as the value of its holdings declined by 7.9 trillion yen," Bloomberg reports, adding that "the fund lost 8 trillion yen on its domestic and foreign equities and 241 billion yen on overseas debt."
Bloomberg goes on to note that "the loss was GPIF’s first since doubling its allocation to stocks and reducing debt last October, and highlights the risk of sharp short-term losses that come with the fund’s more aggressive investment style." In fact, if you strip out a portfolio of government bonds tied to fiscal stimulus spending, "the drop was the fund’s third-worst on record, exceeded only by declines in the depths of the 2008 global financial crisis and the aftermath of the Sept. 11, 2001 terror attacks."
In sum:
Here's a look at the trends in asset allocation via Nomura:
The fund's share of domestic bonds sat at 38.95% at the end of September, up from 37.95% in Q2 while the share of domestic equities fell to 21.35% from 23.39%. But that just reflects the valuation effect. As Nomura points out, it's likely that GPIF bought equities at a higher rate during Q3 (fiscal Q2) than during Q2.
For the punchline we go to Hiroyuki Mitsuishi, a councilor at GPIF, who says that when you really think about it, doubling the allocation to stocks when equities are at all-time, Kuroda-inflated highs is probably the best way to safeguard retirees' income - you know, except for all of the volatility:
“Compared to our past portfolio, swings in returns have become wider. But in the long-term view, we see there’s less risk of failing to meet pension payouts with the new portfolio.”
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Go ahead and lose it. We'll just print moar.
Never pick a fight with someone that buys ink by the barrel.
LOL
Or in this case, a central banks that buys its electricity by the megawatt.
<How many zeros do you want to the left of the decimal point?>
Tune into CNBC later today to see the special segment on how a $64 billion loss......is a good thing.
They don't actually buy ink anymore....but you get the idea.
Bail out the 51st state of Japan they were only following orders from the squid/FED , Mr. Yellen will cook that amount up before breakfast and buy more stawks than ever.
Some day, and some day soon, I would like to loose a single Billion dollars.
It's on my bucket list.
In this zero sum game, someone else must have made $64 billion minus trading costs. Paging Goldman Sachs.
Didn't the japanese buy the real estate top in the 80's which much of it...NEVER CAME BACK. They just do disaster after disaster.... Most of us...willl never see this top again...we are talking multi-generation disaster! The crooked Japanese have a way of buying the Stupid Top
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2 decades of idiocy
Only following orders from the USSA
If the American people are sheep, what does that make the Japanese?
radioactive sheep?
Glowing wool export will save Japan. Problem solved.
Funny joke , but all that radiation is going directly to the US west coast. Why do you think the criminal EPA stoped monitoring radiation? No glowing Japanese but a lot of glowing fish in the waters off the US west coast, you should know the joke is on your dumb amerikan ass.
Ya gotta love it...lol...only those in control of government pension funds could manage to lose money even as governments around the world print "money" with reckless abandon.
Apparently governments have the same vetting process for pension fund managers as they do for the politicians that hire them ;-)
If the banks are going to win all of the time, then someone has to lose.
Well as for myself (me being such a trusting & non-cynical guy and all...lol) I'm starting to think there might be a little palm greasing and kick-back involved.
I mean, "the money" doesn't just go away, someone takes it ;-)
... but if they did not do what they were told, then they would be Fukashima's again. They are very vulnerable and have little choice.
This is bullish for bullishness.
Scratch him off the re-education camp list.
He's got it.
Anything that happens.....is bullish......anything.
So, pension funds don't adopt the same long/short HFT no-losses strategy that banks do?
Apparently the Government Sheep Fund has a different strategy.
"No one saw this coming," the bankers and hedge fund managers testified.
The Committee head re-assured the banker not to worry, he is covered 100% by the "No Banker Left Behind Central Bank Policy."
"All the losses will be passed on the the little peeples," he told them.
The Japanese deserve everything that is coming to them.
Abe's approval rating has apparently improved despite all the mess his idiotic policies created.
http://asia.nikkei.com/Politics-Economy/Policy-Politics/Abe-regains-supp...
I think a lot of you hedgers here don't really get it, do you?
Most investors, the ones with money, REAL money aka the 10%, (like 'merican investors) don't give a single fuck for their own country.
They will bet against their own kidth and kin it if it makes them money.
They see a leader and they think in yen. If leader makes good yen then leader good. If leader make bad yen, he unpopular.
Abe is flying around the ME and asia, selling nukes for GE/Mitsubishi/yakuza et al, fighting against the French and Russian nuke makers.
World wars are simply turf wars for the 1%, using the 9%'s money, killing off the other 90% because they have no value now.
If every hedger figured this out and integrated it into their being we would have bloody riots and an end to this rule by psychos.
But something....deeply cynical about me....suspects that the other 90% are classless assholes who deserve what .gov does to them.
And deserves it deep...and hard....with no vasoline.
*less than three hundred people rule the world for the less than ten other people who really rule it
The average working Japanese is as screwed as the average working American. DC, like Tokyo, is totally disconnected from their peeples. Even Newt writes about this in his book the people are no longer relevant to DC politics. He said it's all about lining your pockets with lobbist money and catering to various special interest groups.
he's right.
The investment world has been destroyed by Central Banks and the corrupution that runs right to their roots.
Good move Japan. Buy high and sell Low. A real winning solution for sure.
Central Bankers and the ass licking politicians should be strung up and put out of OUR misery!!!
...coming to a pension <scam> fund near you
I tell everyone Know.
The music will end when the .gov pension funds are reduced to zero.
Then the boomer free shit army will take a stand and march on empty government offices.
Because working for a criminal government abolsves you of culpability if you have a pension.
If I were born in 1990 or later, I would be accumulating VXX in anticipation of the stock rout.
Interesting that the NIKEI has not seen new, historic highs since the asset bubble blew out. But the Japanese were left with extraordinarily high prices in the aftermath.
$NIKK Monthly
http://schrts.co/mNvyQL
Here's the problem with accumulating VXX:
"Unfortunately using VIX futures introduces a host of problems. The worst is horrific value decay over time. Most days both sets of VIX futures that VXX tracks drift lower relative to the VIX—dragging down VXX’s value at the average rate of 5% per month (65% per year). This drag is called roll or contango loss."
Japanese version of MyIRA.
circa 1999: In the nine years following the burst of Japan''s economic bubble, the Japanese buyers of stakes in Rockefeller Center, Tiffany, MCA and trophy properties much like Pebble Beach not only had their egos deflated but their pockets picked as they eventually sold at prices 40 to 60 percent off...
I stand by my call. The next bear market will be slow, last at least ten years, and begin, well, what time is it?
Since 2012 the YEN is down 60% versus the dollar and the DOW is up 50%. Shoulda bought US stawks ;-)
Canadian pensions were secured by purchasing Pets.com
NKY is up 16& so far in Q4, so the fuckers are probably fine and happy.
FUCK YOU, KURODA!!!!!!!!!!!! BASTARD!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
I'd hate to be in a pension, knowing that you have a bunch of MFers who can't wipe their own ass running them. This never ends well. Beam me up, Scotty.
whats to know you index, its a lot harder to figure out the bond market
its pretty simple, government provides liquidity to promote growth in stocks, by issuing zero interest bonds. they can monetize all the government spending they want, there is no inflation and pension funds in turn buy stocks ensuring plenty of demand and a doubling of asset values every five years. what can go wrong?
TBTF will bail them out if anything blows up in their faces because if the Insurance companies fail so too does the TBTF banks. Bank interconnectivity cannot afford the risk.
The "Touchdown" picture rules more than San Dimas High School Football.